OMAHA, Neb. (AP) — Warren Buffett’s failure to beat the
stock market in four of the past five years has raised the issue of
whether Berkshire Hathaway’s 83-year-old CEO has lost his touch.
Buffett
is likely to face questions about the conglomerate’s performance when
more than 30,000 shareholders gather for Berkshire’s annual meeting in
Omaha, Nebraska, on Saturday.
It’s not the first time people have
wondered if Buffett is off his game. Criticism of Buffett reached its
peak during the 1990s tech bubble because he refused to invest in
dot-com businesses he didn’t understand. Berkshire’s Class A stock sunk
to roughly $56,000 a share.
When the tech bubble burst, many of
those businesses failed while Berkshire continued to prosper through
acquisitions and investments. These days, Berkshire’s A stock trades at
more than $193,000 a share.
Author and investor Jeff Matthews, who
wrote "Warren Buffett’s Successor: Who It Is and Why It Matters," says
criticism of Buffett is a byproduct of where the overall market is
because Berkshire tends to trail a surging stock market. The Standard
& Poor’s 500 index soared 30 percent in 2013 and has nudged up
another 2 percent this year.
"Buffett always looks less exciting when everyone else does great," Matthews says.
Many
investors focus too much on recent history. Critics point out that
Berkshire lagged the market in four of the past five years, based on
Buffett’s own yardstick. That measurement, Berkshire’s book value,
gained 18.2 percent in 2013, lagging S&P 500’s rise of 32.4 percent,
including dividends.
But that short-term view obscures the fact
that Berkshire Hathaway has only trailed the S&P 500 10 times since
Buffett took over in 1965. And cumulatively, Berkshire has delivered
compounded annual gains of 19.7 percent to the S&P 500’s 9.8
percent. Berkshire is also sitting on at least $48 billion in cash.
Buffett
has told investors for several years that the massive size of Berkshire
makes it impossible for him to match the investment gains he delivered
decades ago, but he still believes Berkshire will beat the overall
market.
Bill Smead, founder of Smead Capital Management, says most
people have a hard time relating to someone who thinks in terms of
decades, and in his last shareholder letter, Buffett emphasized he
thinks Berkshire subsidiaries like BNSF railroad and MidAmerican Energy
will be thriving a century from now.
"He is the ultimate long-duration thinker," says Smead, who recently increased his firm’s
Berkshire investment.
Smead
says he expects Berkshire will trounce the S&P 500 over the next
five to ten years because so many of its subsidiaries thrive when the
economy is growing.
"I don’t think people realize what a machine he has created to milk the U.S. economy," Smead
says.
Last year, Berkshire’s profit grew more than 31 percent to $19.48 billion on revenue of $182.15 billion.

Those
figures include $4.3 billion in paper gains on investments and
derivative contracts Berkshire holds, up from $2.2 billion the previous
year.
Even without those mostly unrealized gains, most of Berkshire’s roughly 80 subsidiaries are performing
well.
Berkshire
subsidiaries include BNSF railroad, Acme Brick, Shaw Carpet and Home
Services of America. Berkshire also holds major investments in American
Express, Coca-Cola, and IBM. Its first-quarter results will be released
Friday.
Andy Kilpatrick, author of "Of Permanent Value: The Story
of Warren Buffett," says he thinks Berkshire is set up to consistently
beat the S&P 500 by a narrow margin.
"The whole thing is up and running better than it ever has been," Kilpatrick says.
Besides
routine items, Berkshire investors will vote on a shareholder proposal
that would encourage the company to pay a dividend. Berkshire’s board
opposes the proposal.
Buffett has said he believes that
reinvesting Berkshire’s cash is worth more for shareholders than they
would receive in a dividend. Since Buffett controls 34 percent of the
voting power, it’s difficult for proposals to pass without his support.
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Online:
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